The Rysaffe Principle

'Rysaffe principle' is a way of using multiple trusts to reduce the Inheritance Tax payable as each trust has its own nil rate band.

The 'Rysaffe principle' relates to Rysaffe Trustee Co (CI) v Inland Revenue Commissioners (2003) where a series of trusts were created on consecutive days. The principle is that by establishing a series of smaller trusts rather than just one, you can reduce the impact of the 10-yearly periodic charge and exit charge by benefiting from a nil-rate band for each individual trust.

The benefit of doing this reduces the IHT payable, as the example below demonstrates.

In the example we have assumed that, after ten years, the nil rate band remains at £325,000 and there have been no other previous chargeable lifetime transfers (CLT) other than those shown. 

For term based life plans the basis of valuation at the 10-year point is the market value of the plan. As term plans do not accrue a surrender value, the only time a charge might be payable is if the market value was higher than zero due to the ill-health of the life assured or following a claim if the proceeds remain in the trust for future distribution to the beneficiaries.

Entry charge

If one life assurance policy providing £600,000 on death is placed into the trust; the full Nil Rate Band (NRB) is available; no other exemptions have been used elsewhere; the tax liability at entry would be:

Scenario 1

Value of transfer £0
Less available NRB £325,000
Liability to tax at 20%1 £0
Tax Due £0

1 For transfers made after 15 March 1988, the tax charge is at half the death rate. The death rate is currently 40%.

IHTM14534 - Inheritance Tax Manual - Lifetime transfers: the charge to tax: immediately chargeable transfers: rate of tax

If we now consider creating three trusts each for plans of £200,000 on separate days.

Scenario 2

Plan 1:   
£200,000 gifted into the trust on day one. Value of transfer £0
Previous chargeable lifetime transfers (CLTs) £0
Less available NRB = £0 + £0 = £0 - £325,000 £0
   
Plan 2:  
£200,000 gifted into the trust on day two. Value of transfer  £0
Previous CLTs £0
Less available NRB = £0 + £0 = £0 - £325,000  £0
   
Plan 3:   
£200,000 gifted into the trust on day three. Value of transfer  £0
Previous CLTs  £0
Less available NRB = £0 + £0 = £0 - £325,000 £0

In this example the entry charge is the same for the one trust route as it is for using three trusts.

10-year periodic charge

IHTM42087 - Inheritance Tax Manual - Ten year anniversary: calculating the rate

If we consider that

  • a claim has been made
  • £600,000 was paid to the trust(s)
  • it’s the 10 year anniversary
  • the NRB is still £325,000
  • there have been no other previous CLTs or exit charges

Then the 10-year periodic charge is calculated as follows:

Scenario 1:

Current value of trust fund £600,000
Previous CLTs in seven years before creation of Trust £0
Plus any distributions that give rise to an exit charge £0
Less NRB £325,000
Taxable amount  £275,000
Hypothetical CLT tax at 20%  £55,000

Effective Rate = hypothetical CLT tax/current value of Trust Fund

(£55,000/£600,000) x 100

9.2%
10-year anniversary charge = current value of trust fund x 30% of effective rate

£600,000 x 9.2% x 30%
£16,560

If the benefits have been split between three three trusts each for plans of £200,000 on separate days.

Scenario 2 

Plan 1:   
Current value of trust fund £200,000
Previous CLTs in the seven years before creation of Trust 1 £0
Plus any distributions that give rise to an exit charge £0
Less NRB (£200,000 - £325,000) £0
Taxable amount £0
   
Plan 2:   
Current value of trust fund  £200,000
Previous CLTs in the seven years before creation of Trust 2 £0
Plus any distributions that give rise to an exit charge £0
Less NRB (£200,000 - £325,000)  £0
Taxable amount  £0
   
Plan 3:   
Current value of trust fund  £200,000
Previous CLTs in the seven years before creation of Trust 3  £0
Plus any distributions that give rise to an exit charge £0
Less NRB (£200,000 - £325,000)  £0
Taxable amount £0

The result is that we have created a series of trusts where the 10-yearly periodic charges are now £0 and any future distributions in the following 10 years will also be taxed at this rate.

This compares to scenario 1 where there is tax to pay of £16,560 at the tenth anniversary. There will also be tax on any future distributions of capital in the following 10 years.

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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Last updated: 27 Mar 2019

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.